Wednesday, January 3, 2007

“A riddle wrapped in a mystery inside an enigma” - Sir Winston Churchill

The Federal Reserve Meeting minutes show that the FED is quite concerned about the housing market – and well they should be. For all the attempts by the interested parties, such as home builders and realtors, to manipulate the public into believing the housing market is close to bottoming it is becoming increasingly clear that the U.S., and certain regional housing markets in particular, have a long way to go before hitting bottom. "Considerable uncertainty regarding the ultimate extent of the housing market correction meant that spillovers to consumption could become more evident, especially if house prices were to decline significantly," the minutes said.

"Federal Reserve officials said inflation was ``the predominant concern'' last month even as risks to economic growth increased." Bloomberg News, January 3, 2006

So, the FED is still concerned about inflation… but what inflation? Surely the FED is not talking about flat-screened T.V.’s or Chinese textiles. No, the FED is concerned with the price of imported crude oil. The U.S. borrows $1 billion every business day of the year to finance its oil imports. If the price of Oil were to rise, the trade deficit would rise. Any significant expansion in the trade deficit would likely cause an increase in interest rates, perhaps a sharp increase. That is why Inflation is "the predominant concern".

Yes, I know crude oil fell $3 today. Yes, I know that winter has been called off due to global warming… That does not mean the Oil crisis has been called off as well. In order to pull off the “soft landing” in the economy, The FED must walk the tight rope between killing the housing market (too late) and reigning in demand for Oil by slowing the economy via FED policy. This is known technically as being stuck between a rock and a hard place. Worse, it won’t work, if you believe in Jevon’s Paradox (you can google this for a detailed explanation). China, India, Viet Nam… will happily soak up any Oil the U.S. economy no longer needs.

The weather will have no long-term affect on the Oil market. But it may provide an opportunity.

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